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Operation Choke Point, a U.S. Department of Justice effort to shut down fraudulent merchants by going after payment companies that provide network access, shows no signs of going away any time soon, despite growing merchant and processor frustration with the initiative. Earlier this month, that frustration gave rise to a little-noted lawsuit from a group of payday lenders seeking to stop Choke Point.
On Monday, Justice posted a video of U.S. Attorney General Eric Holder speaking about why the investigation is necessary and what it hopes to achieve.
“The goal of these investigations is quite simple,” Holder said. “To protect consumers from scam artists and collaborating institutions, in every circumstance and industry.”
He outlined the rationale for targeting banks and third-payment payment processors. “But the fraudsters can’t act alone,” Holder said. “In many cases they need access to the banking system to pilfer money from their victims. They frequently use third-party payment processors as intermediaries to route payments through financial institutions.”
Surfacing in 2013, Choke Point has since gained more momentum. Holder mentions an investigation that saw the Four Oaks Bank of North Carolina agree to pay $1.2 million in penalties for enabling an unidentified third-party payment processor access. “Allegedly, these third-party payment processor’s merchants included large numbers of Internet payday lenders that engaged in fraud against borrowers,” Justice said.
“In North Carolina and elsewhere, the Justice Department’s efforts are sending a clear message that such activities are irresponsible,” Holder said. “And they will not be tolerated.”
Holder said he expects many of these investigations to be resolved in the months ahead.
While some may laud these efforts, others say the department is unfairly targeting legal businesses that are not involved in fraudulent activities.
One organization, the Community Financial Services Association of America, has taken to the courts to halt Operation Choke Point. The Alexandria, Va.-based group, which represents the payday-loan industry, filed suit June 5 in the U.S. District Court for the District of Columbia.
The suit alleges federal agencies, including the Federal Deposit Insurance Corp., the Federal Reserve, the Office of the Comptroller of the Currency, and Thomas J. Curry, comptroller of the currency, are engaged “in a concerted campaign to drive them out of business by exerting back-room pressure on banks and other regulated financial institutions to terminate their relationships with payday lenders.”
No hearings have yet been scheduled for the case.
The Electronic Transactions Association, which represents the merchant-acquiring industry, has taken a different tack, says Jason Oxman, ETA chief executive. It has been trying to work with the Justice Department. “We endeavor to be a partner with law enforcement,” Oxman says. The ETA published a set of merchant guidelines in April to aid acquirers in their efforts to eliminate prohibited and undesirable merchants from the payment system. “We don’t want fraud on the network any more than the Department of Justice does,” he says.
At least 50 investigative inquiries into payment companies as part of Operation Choke Point are ongoing, Oxman says.
“We’ve talked directly to the Justice Department and the Federal Trade Commission to express our concern directly about Operation Choke Point, and we have spent a lot of time on Capitol Hill to express our concern to lawmakers,” Oxman tells Digital Transactions News. “Our concern is that Operation Choke Point views payment companies as the choke point.”
Holder’s video suggests an increase in public concern about Operation Choke Point, Oxman says. “Rather than pursue fraudulent merchants directly, Operation Choke Point has as its hallmark the pursuit of payment companies that provide access to the payment network,” he says.
